China Hints at Breaking Up Large Banks

In a shocking news brief on Tuesday, the Chinese Premier Wen Jiabao announced that he will be breaking up China’a banking monopoly to help promote a healthier financial system and growth. The Premier spoke to citizens through the country’s China National Radio and made the announcement. He pointed to the fact that banks are making profits “too easily” because of its monopoly stature.

This comes only days after China’s largest banks announced record profits. Net income at three of China’s largest banks; Industrial and Commercial Bank of China (HKG:1398), China Construction Bank Corporation (HKG:0939) and Bank of China (BOC), reached close to $110 billion last year.

The Chinese leader also said that the recent reforms in Wenzhou, Zhejiang province, would expand to the rest of the country. Last month, the Chinese government announced a financial reform package for the city which is expected to revamp the nation’s financial system. Also, in an interesting development, China allowed private lenders to conduct themselves as investment firms to help fund Chinese companies.

All of these recent moves are said to be China’s beginning steps towards a more “liberal” financial system. I would not interpret that as China is going Capitalist but certainly a number of changes are giving the illusion of a Capitalist society. China has been Communist since the early 20th century; it is not going to give up its traditions as a Communist country.

A “liberalized” financial system for China is going to benefit everyone though. It will benefit China because it will operate in a more competition based environment that may be a little more relaxed on foreign companies setting up shop in the country. This helps companies such as Apple which could have an easier time selling its iPhones through Chinese carriers such as China Mobile. However, the true effects of these changes are yet to be determined and we have seen similar actions before by the Chinese only to go back into the classic Communist mindset.

Breaking up the banking sector is a great start though. It will give a chance for other Chinese banks to come into the market and compete for business. Ultimately, this is going to be better for your financial system because you will now have less unemployment because there are more banks competing which need employees to run. Next, you will have more bank operations and investments in the country which could help growth in certain areas. The only thing that China needs to be careful about with more banks is relaxing regulation so that it experiences what the US and Europe have gone through in the past few years. All in all, these are positive steps for China and their economy. We will wait to see how “liberal” the Chinese government gets with its financial system before we can make any assumptions.